Deinonychus antirrhopus

Universal Health Care: Problems and Issues

I have blogged quite a bit about universal/government provided health care over the years. This time I thought I'd put many of the criticisms in one post. This means this will be a long post, but it should cover most of the objections/problems I know of about when the government gets into providing health care. So click the link below to keep reading.

The first problem deals with the issue of universal health care and how it creates both winners and losers. Universal health care is basically a big pooling equilibrium. A pooling equilibrium is basically where everybody is put into the same "pool" and insurance contracts are designed around that pool. The simple version would be where the premium for the plan would be determined by subtracting off the deductible amount from the expected total cost and then dividing by the number of people in the pool. The problem is that every pooling equilibrium is broken by a separating equilibrium. A separating equilibrium derives its name from the idea that individuals with different risk levels will be separated into smaller groups. Typically this is simplified to two groups (high risk/low risk). The low risk contracts will have higher deductibles since the individual has a lower chance of getting sick they will see the expected deductible as being reasonable. A person who is higher risk wont want to pay such a deductible and will hence voluntarily select the high risk contract (lower deductible, but higher premiums).

Thus, with a pooling equilibrium the low risk individuals end up subsidizing the high risk individuals. Thus, with a pooling equilibrium enforced by the threat of State sanctioned coercion, those who are low risk are the losers.

One counter argument to this is that even high risk people who don't have insurance still receive treatment and so the low risk people still subsidize those without insurance. The problem here is the conflation of those who are high risk with those who are uninsured. In other words it is possible for people who are low risk to voluntarily go without insurance (i.e., make a rational decision to be uninsured). Thus, the subsidy for the uninsured is born by both high and low risk individuals who have insurance. Or to put it slightly differently, the argument above about the pooling vs. separating equilibiria is not about the uninsured, but about forcing high and low risk people into the same category when determining how the cost of the government provided plan is to be shared.

Another argument by many who support government provided health care/universal health care is this almost religious belief that by having the government provide health care the costs will grow at a much slower rate or even decline. Those making such arguments note that the U.S. system of health care has a very high administrative price tag on it. Thus, they assume that with the government taking over they would reduce this price tag to a smaller level. There are some problems with this kind of thinking.

First off, is the implicit assumption that the firms that pay the high administrative cost do so out of stupidity, ignorance, or just plan on incompetence. While this is possible, I think it is extremely unlikely. Granted any given firm might be stupid, ignorant, incompetent or even all three. But every single company possesses one or more or all of these traits? That I find rather hard to believe. It seems to me that some smart enterprising young person would come along see all this wasted profit and set up a well run health care providing company. Others would see this and emulate him, and soon the gross bureaucratic waste is wiped out.

So, this leaves us looking for another reason why there is such a high administrative price tag. One possibility is that it due to the institutional environment. For example: lawsuits. Could lawsuits result in unnecessary documentation/administrative expenditures? Also, there is the regulatory structure. The government is already a large presence in the health care industry and it could be that complying with various local, state, and federal regulations impose an additional regulatory burden on health care firms.

The things is I see no reason either of these two factors to go away if the federal government to either take over of assume a larger role. In fact, one could argue that the burden imposed by regulations might actually increase under a scenario where the federal government expands its current role. So on this cost savings I see a great big maybe. I find it rather misleading when people use this kind of argument. Not that they are using this argument, but that it is presented as a sure thing instead of being couched in terms of uncertainty.

Another erroneous argument is the preventative argument. This basically relies on the shibboleth, "an ounce of prevention is worth a pound of cure." While there is some truth in this saying, it has to be approached very carefully. Incentives are a rather tricky thing; in that there is usually hidden information, hidden actions, and/or non-verifiability are work. For the approach to work, the system should have fairly easy access for the consumer. After all, one wants to catch an illness before it gets to the later and more costly stages. But and easy access system is also one that is ripe for abuse and waste. People might start going for non-serious issues. Also, people not knowing when something is or is not serious might just figure on going no matter what. Thus it is possible that the extra costs in prevention outweigh the savings due to prevention. In other words, while the state, "an ounce of prevention is worth a pound of cure," works on the individual level, it might not work at an aggregated level such with the health care market. There is a reason there is the fallacy of composition.

Finally there is the normative issue of is this how government revenues should be spent? There is an implicitly assumption on the part of those who favor government provided/universal health care. This assumption is that hte government is Right to spend this money in this way. However, that is indeed not the case every time. It is quite possible that people would rather take those government revenues and spend them on other things. That is suppose the government provided health care cost $1,000 per person. Now, which would people rather have,

1. The health care,
2. The money?

It is hard to argue that everybody would want the health care. In fact, I say it is impossible to argue this way. If it were true that people would rather have the health care instead of the money, then it is also true that if you gave them the money they could buy health care coverage themselves. If they don't do this with the $1,000 then it is saying that they do not want the health care coverage, but something else. Thus, the government could make people better off by simply giving them a monetary transfer vs. forcing them to consume something. Is it ethical to force such an outcome on people? I don't know, but it hardly looks like an open and shut case. My initial inclination is to say, "No, it is not ethical."

All of these considerations do not mean the government provided health care is un-necessary or undesirable. However, it is the refusal to honestly discuss these kinds of issues that makes the Left misleading and deceptive. Instead of focusing on these serious policy issues they resort to emotion filled arguments, insults or both. When somebody raises these objections they are called right wing whack jobs. The problems our downplayed with little or no empirical research or evidence. Alternatives that give people greater choice are dismissed out of hand. And yes, I have my own personal prefrences/biases on this issue too. I'd prefer a system with a monetary transfer vs. a Nanny like program that comes with a horde of bureaucrats and a truck full or regulations. Even a subsidy for health care spending would be preferable in that at least we'd still have many of the beneficial aspects of the market that help restrain costs.¹
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¹This may come as a shock, but profit maximization also implies cost minimization (at the profit maximizing level of output).